Margin Returns

Uncovered options trading is limited by certain margin requirements. As a result, there are two ways of representing trading system's returns. The returns can be tied to the premium received for selling options short or returns can be tied to a hypothetical margin account that is used to sell options short.

Each way of calculating returns has its pros and cons. The first one (tied to the premium) is very simple, straightforward and represents an exact return in relation to a premium. The limitation of the first method is that it does not take into account margin requirements and does not represent "$" value. Furthermore, in some cases it can be difficult to evaluate "$" returns.

The second method (tied to a margin account) allows one to better see possible "$" returns. However, the returns are approximate. As a rule, margin requirements vary from broker to broker. Usually they are similar. However, different brokers use different margin formulas, use different coefficient in those formulas and, in addition, some brokers may have additional margin rules.

The return results represented on our web site are based on the premium received for selling the options short and do not reflect margin. It is recommended that you contact your broker about margin requirements on uncovered options trading before using any information on this web site. As an example of margin return, we have "Trade Calculator" which allows one to recalculate past performance in relation to the margin requirements. This calculators uses a margin formula and gives an approximate margin portfolio growth (bear in mind your broker may use a different margin formula).

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